When you're new to using credit, learning the language can help you understand how credit works and how it impacts your loan options. When you have good credit, you can apply for loans with the best rates that can save you money.

In addition, knowing how credit works and what lenders expect can help you be prepared when you apply for loans. Use these terms to get smarter about your credit.

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APR

Short for "annual percentage rate," APR represents the true cost of borrowing, not just the interest charges. The APR is especially relevant for mortgages, on which some lenders offer low interest rates but charge more upfront fees such as points or origination fees. The APR includes all of these costs.

Application Scoring

Application scoring refers to how financial institutions grade your application for credit, such as a credit card or a loan. Not only does it determine whether you are approved or declined, it also determines the features of your credit such as the interest rate and credit limit. Financial institutions are prohibited from using certain characteristics, such as your age, gender, race or religion.

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Authorized User

An authorized user is someone who is added to another person's credit card account. The authorized user is generally not liable for the debts on the account, but the account's credit history can have an impact — positive or negative — on the authorized user's credit score.

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Balance

The balance is the amount that you owe as of the date of a loan statement. Depending on the loan, the entire balance could be due, or you could only be required to make a minimum payment amount.

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Bankruptcy

Bankruptcy is a legal procedure for dealing with the debts that you are unable to pay as they come due. The results depend on which type of bankruptcy you file, with the two common forms for individuals being Chapter 7 and Chapter 13.

In Chapter 13, you get to keep most of your assets and restructure your debts so you can pay them over time, typically three to five years. With Chapter 7, most of your assets are liquidated to pay creditors, and most debt that isn't paid is then written off.

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Charge-Off

A charge-off, also known as a write-off, refers to debt that a creditor has determined is unlikely to ever be collected. Even though the account might be marked as final on your credit report, it doesn't mean you don't still owe the money. Creditors can sell that debt to debt collectors, who can then try to collect it.

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Collateral

Collateral refers to assets pledged to secure a debt that the creditor can take if the debt is not paid. For example, when you take out a mortgage, your home is collateral. If a creditor doesn't require you to pledge collateral, it's known as an unsecured loan, like a credit card.

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Collection

When a creditor determines a debt is unlikely to be collected under normal methods, it might turn that debt over to its collection department or sell it to an external collection debt company. When the original creditor transfers it to an external collection agency, it is reported as a "collection" account on your credit report and has a big negative impact on your report. Collection accounts remain on your credit report for seven years.

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Consumer Credit File

Your consumer credit file is the raw data that has been collected on your debt repayment patterns, including whether you pay your debts on time, how often you apply for new credit and how much you owe. It also includes identifying information, like your address and Social Security number, and public records like bankruptcies and tax liens.

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Credit Bureau

A credit bureau compiles the information in your credit file into credit reports and credit scores that financial institutions can then use to determine your creditworthiness as a borrower. The three major credit bureaus in the United States are Experian, Equifax and TransUnion.

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Credit Bureau Risk Score

A credit bureau risk score is another name for a credit score, which is based on the information in your credit report. The higher your score, the smaller the risk of default you pose to your lender. Each credit bureau has a different score and a different name for the score it uses. For example, the most widely used score for mortgages is the FICO Score, but Equifax calls its bureau-specific score the Beacon Score.

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Credit History

Your credit history is a record of how you've handled debt in the past. It includes records for all of your loans, including credit cards, student loans, car loans, personal loans and mortgages, and plays a large role in determining your credit score. Your credit report will include your credit history.

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Credit Obligation

A credit obligation is an agreement that makes you liable for repaying a lender for a loan. Obligations include debts such as a credit card balance or a loan.

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Credit Report

Your credit report is a summary generated from your credit file, and includes all of the credit lines, loans and financial public records like judgments, foreclosures and bankruptcies. Your credit report also includes your Social Security number, birthday and employment information, but that information is not used in determining your credit score.

Debit Card

A debit card is linked directly to a deposit account so that purchases made are instantly deducted from your available balance in that account. Instead of having a credit limit, like a credit card, you can spend as much as you have in your account. But, unless you sign up for overdraft protection, you can't spend more than you have in your account. Some debit cards even offer rewards programs.

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Default

A default occurs when you fail to pay your debt as you agreed under the terms of the loan. A debt is considered to be in default when you're late, or delinquent, on payments for a certain period of time, usually for several months. If you default on your student loans but then rehabilitate them, you can remove the default from your credit report. But your late payments leading up to the default will not be removed.

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Delinquent

An account becomes delinquent when you miss a payment. When you miss a payment, it shows up on your credit report — the more recent the missed payment, the greater the negative impact on your credit scores. A late payment will stay on your credit report for seven years.

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Equal Credit Opportunity Act

The Equal Credit Opportunity Act (ECOA) is a federal law passed in 1974 to prevent discrimination based on race, color, religion, national origin, sex, marital status, age, income from public assistance, or for exercising your rights under certain consumer protection laws. It is the Consumer Financial Protection Bureau's responsibility to enforce the law and prevent banks and other lenders from discriminating illegally.

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Equifax

Equifax is one of the three major credit bureaus in the United States. It was founded in 1898. Today, Equifax analyzes data from over 820 million people and 91 million businesses worldwide.

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Experian

Experian is one of the three major credit bureaus in the United States and traces its history to 1826. The company provides services in four key areas: credit services, decisions analytics, marketing services and consumer services.

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FICO Credit Score

A FICO credit score refers to a score calculated using an algorithm created by the Fair Isaac Corporation (FICO). FICO scores range from 300 to 850, with a higher score meaning you are a better credit risk. To calculate a FICO score, you generally need to have an account open for at least six months and have reported to the credit bureau within the past six months.

Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) is a federal law that sets standards for credit reporting in the United States. It places limits on whom and under what circumstances your credit information can be released, and gives you the right to request a free copy of each credit bureau report once every 12 months. If you are declined for credit, such as if a bank turns you down for a loan, you're entitled to an additional free copy.

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Grace Period

A grace period refers to the time you have between the end of a credit cycle and when your payment is due. For example, say your credit card cycle ends on the last day of the month. If your payment isn't due until the 25th of day of the following month, you have a 25-day grace period. As long as you pay by that due date, your credit report won't report you as being delinquent on your loan.

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Hard Inquiry

A hard inquiry refers to a creditor's request to pull your credit information in response to you applying for credit. For example, if you apply for a mortgage and the lender pulls your credit report, a hard inquiry will show up on your credit report. Each hard inquiry remains for two years, but only affects your score for one year.

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Installment Debt

Installment debt is debt you owe on an installment loan, which is when a lender gives you money that you will pay back with regular payments over a fixed period of time. Each time you make a payment on time and in the full amount of the installment payment, your credit score will benefit.

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Installment Sales Contract

An installment sales contract is an agreement in which you pay the seller over time, including interest on the purchase price. An installment sales contract is slightly different than an installment loan in that the seller agrees to take payments for the item, rather than you borrowing the money to pay the seller and then repaying a lender.

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Insurance Bureau Score

When you apply for insurance, such as auto or homeowners insurance, most insurers will pull your insurance bureau score as a factor in determining your insurance premiums. Your insurance bureau score includes factors like your payment history, total debt, age of your accounts and how many accounts you have opened in the past 12 months.

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Joint Account

A joint account is an account for which more than one person is legally responsible. If one of the account holders runs up debt, the other account holders can be made to pay the entire amount — even if he or she didn't charge any of it. Having a joint account differs from naming an authorized user because, with a joint account, both people are on the hook for paying the debt, not just the primary account holder.

Keep and Pay

Keep and pay refers to an option debtors have in bankruptcy to continue to keep their car. If you're current on your payments at the time you declare bankruptcy, you can pay a lump sum to buy the car at its current value, not the loan amount. Otherwise, you can enter a reaffirmation agreement, under which you agree to keep the car under your existing loan terms as long as you keep making payments.

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Late Payment

A late payment is any payment that you make after the due date. However, lenders and credit card companies typically report payments that are more than 30 days late to the credit bureaus. Only late payments that are reported to the credit bureaus affect your credit report and credit score.

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Limit (Credit Limit)

Your credit limit is the maximum amount that you can borrow or charge against your line of credit before your lender cuts you off. If you go over your limit, your lender could charge fees, decrease your credit limit in the future or reject the transaction. In addition, if your balance is close to your limit, your credit score will decline. You can also work with your lender to raise your credit limit.

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Minimum Due

The minimum due is the smallest payment you can make on your credit card that will count as paying on time. If you don't make at least the minimum payment, your credit card issuer can charge additional fees, raise your interest rate and report you as being late to the credit bureaus.

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Negative Amortization

Negative amortization refers to a loan on which you have scheduled payments, but your balance increases because the interest that accrues on the account exceeds the amount of your payment. When you don't pay all of the interest each cycle, the unpaid interest is added to your debt and begins to accrue additional interest.

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Overdraft

An overdraft occurs when you write a check or use a debit card for more than the balance of your account. Some banks will reject the charge automatically, while others allow you to choose overdraft protection. If you opt-in to overdraft protection, the bank will pay the charge up to a certain limit but will charge you a fee to do so.

Payment History

Your payment history on your credit report shows how you've paid your trade lines, including credit cards and loans, in the past. Each cycle, creditors report you as either paying on time or late. Your payment history is the most heavily weighted factor in calculating your FICO credit score, counting for 35 percent of your score.

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Primary User

The primary user is the person who is legally liable for a credit card. The primary user has the option to allow other people to charge expenses against the account if he or she wants, but only the primary user is responsible for paying the bill. For example, as the primary user, you could add your spouse or child as an authorized user to your credit card, but you would be responsible for paying any charges they rack up.

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Qualifying Ratio

A qualifying ratio is the minimum debt-to-income ratio a lender will accept in order to issue you a loan. Qualifying ratios are most commonly considered during the mortgage application process, in which a lender doesn't want your monthly mortgage expenses, or your total debt payments, to exceed certain percentages of your income.

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Refinance

Refinancing involves taking out a new loan to pay off an existing debt. You might refinance to obtain a lower interest rate, but you can also refinance to change the term of your loan. For example, if you need to lower your monthly mortgage payment, you could refinance a 15-year mortgage into a 30-year mortgage.

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Revolving Account

A revolving account sets a maximum amount that you can borrow against, but lets you determine — subject to a minimum monthly payment — how much you pay off each month. Any portion that you do not pay off each month incurs interest charges. Examples of revolving accounts include credit cards and home equity lines of credit.

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Scoring Model

A scoring model is a formula developed to calculate your credit score. Contrary to popular belief, there isn't just one credit score. For example, there are separate formulas tailored to whether you are applying for a credit card, auto loan or a mortgage. Plus, each of the three major credit bureaus might have slightly different information on your credit report, so each score could be different.

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Soft Inquiry

A soft inquiry is when your credit score is pulled but not at your request and not in response to your application for new credit. For example, if a credit card company, on its own, wants to preapprove you for a credit card offer and checks your credit, that's a soft inquiry. Soft inquiries will appear on your credit report, but won't affect your credit score. Checking your own credit score is also considered a soft inquiry and won't impact your credit score, either.

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TransUnion

TransUnion is one of the three major credit bureaus in the United States. In the 1960s, TransUnion became the first credit bureau to use automated tape-to-disc transfer rather than accounts receivable data, making it much faster to update credit files. In 2015, the company held an initial public offering and is now a publicly traded company.

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Unsecured Loan

An unsecured loan is a debt that is not backed by specific collateral. If you don't pay it back, the creditor must get a judgment against you and the court could allow the creditor to seize some of your assets or garnish your wages to pay what you owe. But if other creditors have security interests in your remaining property, those creditors have first priority to be paid what they are owed from those assets.

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Utilization

Your utilization rate refers to what percentage of your available credit is being used. For example, if you have a credit limit of $10,000 but have a $1,000 balance on your credit card, your utilization ratio is 10 percent. Generally, the lower the utilization ratio, the better the impact on your credit scores.

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Vantage Score

The Vantage Score is a credit scoring model developed by experts from the three major credit bureaus: Equifax, Experian and TransUnion. Early models of the Vantage Score produced scores between 501 and 990, but the most recent version (Vantage Score 3.0) produces scores ranging from 300 to 850.

The Vantage Score looks at the following factors from most important to least important: payment history, age and type of credit, percent of credit limit used, total debt, available credit and recent inquiries.

Variable Interest Rate

A variable interest rate fluctuates over time, so the interest rate that you pay can go up or down as the market rate changes. The variable rate is often tied to an interest rate index, such as the Wall Street Journal's prime rate. In addition, variable rates often have a margin, which is a fixed amount added to the index.

For example, if your home equity loan interest rate is tied to the Wall Street Journal prime rate, the prime rate is 3 percent, and the margin is 14.5 percent. Your interest rate would be 17.5 percent.

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Wage Garnishment Order

A wage garnishment order is a court order that authorizes a creditor to tell your employer to pay a portion of your wages directly to the creditor. However, the garnishment cannot exceed the smaller of 25 percent of your disposable earnings or the amount by which your wages exceed 30 times the minimum wage, except for certain bankruptcy orders, state or federal tax debts, and alimony or child support.

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X (Regulation X)

Regulation X implements the Real Estate Settlement Procedures Act of 1974 and protects consumers who apply for and have mortgages. It requires lenders to correct loan servicing errors, respond to borrowers' requests for information and provide loss limitation information to borrowers who have fallen behind on their payments. The Consumer Financial Protection Bureau oversees the implementation of Regulation X.

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Yield on Earning Assets

Yield on earning assets is a measurement that compares how much revenue the bank is pulling in based on its assets. This income includes the interest it gets from the loans it has made and funds generated by the bank's investments.

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Zombie Debt

Zombie debt is very old or no longer legally due, often because it's past its statute of limitations. It may be sold by the original creditor to debt collectors, who will then try to collect whatever they can on the debt. Beware of debt collectors trying to coerce you into paying debt that you don't legally owe, such as debt that was incurred through identity theft or debt that you did owe but was discharged in bankruptcy.

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